German Perpective - 15.4.14
15/04/2014
Quite a number of people did not take the situation seriously and believed it could be sorted in the usual Chinese way. However, monitoring the Chinese government and its actions in the past month has made people a bit more realistic about its commitment to cleaning up the environment. A TV report in China on Thursday [about pollution] must have cleared up any doubts that this time the problem will not be cured by a ‘wait-and-see’ policy.
The closure of tanneries in Wuji has congested the raw material supply chain even further. What was more a problem for sheep and lambskins in the past weeks is now becoming a serious problem for bovine hides too. It is true that it will not change leather demand and eventually the hides will be tanned in a different place, but it will take time to sort out while the flow of raw material is re-established - it will not be a question of days, but rather weeks, if not months.
It will not hit everyone in the same way. Those supplying wet blue or standard hides for the industrial shoe and automotive tanners may still see very little of the problem while those shipping more economical hides used by the small and medium enterprises mainly manufacturing for the domestic Chinese market could face some serious problems with shipments and payments.
For the European hide suppliers this means a problem for dairy cows while most other grades will likely continue to move. The real question is if this is going to seriously influence the supply and demand balance of the market.
At first, there might not be too much correlation between the dairy cow and steer market, but if the prices for cows come down it will have also an effect on the premium hides used in the large enterprises. In particular, the economical automotive leather production could quickly shift if the prices for cows become more attractive.
Another factor is the split market, because lime splits produced in China are tanned in Hebei province and won’t be able to find tanners to deal with the capacity. Coupled with the decline of prices for gelatine splits, this will definitely have an effect on the total return for split.
Last but not least we have to consider that even if tanning capacity is going to be shifted - and this will happen - the cost of tanning in China is going to rise and it is going to become more difficult. As a rough estimate, most people think that prices in alternative locations will be about 20% higher than they were in Hebei province. This has to be either paid by the leather buyer or it has to be in part reflected in raw material prices. So far, so bad.
On the positive side, we have been pleased by the fact that business has not come to a standstill. Buyers have become cautious, but they are not totally absent – which one would expect in a situation like this. Where resales or shifts had been needed it has been possible to do so and even a reasonable number of new sales were possible.
One had to make price concessions and the weaker US dollar is hurting, but in the end an acceptable amount of hides were sold this week. We have never been of the opinion that the present price level can be justified and we still believe a correction would be best for the leather market and it seems that there is a common understanding that the controlled and moderate adjustment of prices is in the interest of both sides.
The kill: The kill continues to be steady and reasonable for this time of the year and it seems that some of the supermarkets are already stocking for Easter. Consequently, the kill was a little higher and the next two weeks it will be reduced by the holidays on Friday and next Monday. Weights are acceptable for males but still pretty light for cows.
What we expect: It seems that the balance between supply and demand is beginning to move with sufficient supply beginning to fade. We are entering the low season of leather production and even if some tanners still need to buy, it will be focused on selected raw materials. Depending on the situation in China and currency, we believe that prices will begin to slide under the lead of female material and to a limited extent.
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